Reference no: EM132992225

"High" Profits From Accounting for Cannabis Plant Industry Case

Question 1.

Assume you are the Treasurer or CFO of Cannabis LLC, which files under IFRS. On December 31, 2017 (fiscal year end), your manufacturing facility holds 10,000 female plants in its flowering room. It also holds 17,000 plants in its vegetation room. 8,000 plants are held in the drying room or are in packaging. 25% of all plants have been genetically shown to be high-quality; 50% medium-quality; and 25% low-quality regarding their expected cannabinoid yield. At what value will you report your inventory assets in the end of year financial reports? How did you arrive at your value estimates?

Question 2.

Assume, after you estimate the value of your IAS 41 inventory, the total value increased by millions of Canadian dollars, relative to the prior period. How should you report the unrealized gain change in value on the income statement or the statement of comprehensive income?

Question 3. At the end of 2016, Canopy Growth Corporation (TSX: WEED) reported an end-of-fiscal-quarter gross profit margin of 173.74% . Specifically, the company reported:

How is it possible for Canopy Growth Corporation to report a seemingly impossible above-100% profit margin?

b. IAS 41 provides an example to illustrate "how the disclosure requirements of this Standard might be put into practice for a dairy farming entity". This Standard encourages the separation of the change in fair value less costs to sell of an entity's biological assets into physical change and price change. Specifically, the illustrative example reports the items below. Is the information provided by Canopy Growth similar to that suggested in the IAS 41 illustrative example? In what ways are they different? Which provides better information to stakeholders and how?

Question 4. Consider a cannabis plant that is currently in the vegetative stage. Ignore, for the moment, that IAS exempts agricultural assets from its scope. Does this cannabis plant that is currently in Stage 2 of development meet the definition of an inventory asset as it is described in IAS 2? Support your position using specific language from IAS 2.

Question 5. Why do you think the International Accounting Standards Board (who wrote IAS 2 and IAS 41) thought it was necessary to separately account for agricultural development assets? In other words, why did they elect to exempt these assets from treatment proscribed in IAS 2? Would IAS 2 offer more distortive or inaccurate reporting of the fundamental economics, if it were applied to cannabis crops? If so, how?
Question 6. At the end of 2016, Canopy Growth Corporation (TSX: WEED) reported:

IAS 41 presumes that fair value can be measured reliably for a biological asset. IAS 41 also specifies that a change in fair value should be included in profit or loss. IFRS 13 Fair Value Measurement specifies a hierarchy for measuring fair value:

? Level 1 price for an identical asset in an active market.
? Level 2 estimate of market price that uses a model that relies on observable inputs (e.g. government interest rate yield curves, in the case of valuing an interest-rate swap held by a financial institution)
? Level 3 estimate of market price that uses a model with at least one significant unobservable input (e.g. a discounted cash flow model that relies on management inputs).

a. Consider Canopy Growth's discussion of "significant assumptions" in the excerpt, above, of its annual report's footnote 6. Discuss the implication of these assumptions on the potential relevance and faithful representation of the company's fair value estimates.

b. Do you think changes in estimated fair value of agricultural assets should satisfy the definition of "income" or "expense" in profit or loss? Why or why not? Are there similarities in the IAS 2 guidance that inventories shall be measured at the lower of cost and net realisable value, and write-downs to net realisable value should be included in profit or loss? Which guidance better articulates the financial health of the company?

Question 7. A recent analyst's report advised investors that "it is important to remove non-cash gains included in [Canopy Growth's] cost of sales" and that "Canopy Growth works through these calculations and comes up with a metric called ‘adjusted product contribution.' For FY 2017, the Company's adjusted product contribution was 63% of revenue." 16 Do you agree or disagree with this analyst's view? How might this adjustment help interpret the financial health of the company? Are there arguments against making this adjustment?

Note: Need only Questions 4-7.

Attachment:- Case.rar